CSR under section 135: the board's annual cycle, from trigger test to unspent-amount transfers

Corporate social responsibility (CSR) under section 135 of the Companies Act 2013 is not a one-time decision. Once a company is caught, the section sets up a yearly cycle that the board, a committee and the finance team must run in order: test, constitute, approve, spend, explain, transfer. This note follows that cycle from the point of view of the company's compliance calendar. It does not cover the Rules made under the section, for reasons explained near the end.

Step 1: test the trigger on last year's numbers

Section 135(1) applies to "every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during the immediately preceding financial year" (s.135(1), Companies Act 2013).

Three points matter for the compliance calendar.

Any one limb is enough. The three conditions are joined by "or". A company with ₹5 crore of net profit is caught even if its net worth and turnover are small.
The test is on the immediately preceding financial year. The question for FY 2026-27 is answered from FY 2025-26 numbers. The board can therefore know before the year starts whether the section bites.
"Net profit" is a defined number. The Explanation to s.135 says net profit "shall not include such sums as may be prescribed, and shall be calculated in accordance with the provisions of section 198". A company that reads the profit-and-loss account bottom line and stops there may get the wrong figure.

What section 198 changes in the profit figure

Section 198 sets out how profit is computed for this purpose. The points most likely to move a figure away from the accounting profit:

Credit is not given for profits of a capital nature, including profits from the sale of an undertaking or part of it (s.198(3)(c)).
Credit is not given for "any amount representing unrealised gains, notional gains or revaluation of assets" (s.198(3)(f)).
Credit is given for bounties and subsidies received from a Government or public authority, unless the Central Government directs otherwise (s.198(2)).
Usual working charges, directors' remuneration, and bonus or commission paid to staff are deducted (s.198(4)(a) to (c)).

The practical step is to prepare a short reconciliation from the audited profit to the section 198 figure, and keep it with the board papers. The same figure feeds the spending number in Step 4. The Explanation also refers to sums "as may be prescribed" that are excluded; those come from the Rules, which are outside this note.

Step 2: constitute the committee, or confirm the exemption

The general rule. The company must constitute a CSR Committee of the Board "consisting of three or more directors, out of which at least one director shall be an independent director" (s.135(1)).

Companies without independent directors. A proviso says that where a company is not required to appoint an independent director under s.149(4), "it shall have in its Corporate Social Responsibility Committee two or more directors" (proviso to s.135(1)).

The ₹50 lakh exemption. Under s.135(9), where the amount to be spent under s.135(5) "does not exceed fifty lakh rupees, the requirement under sub-section (1) for constitution of the Corporate Social Responsibility Committee shall not be applicable". In that case the functions of the Committee "shall ... be discharged by the Board of Directors". The test is on the amount to be spent, not on profit or turnover. Check this each year, because the spend figure moves with the three-year average profit (s.135(5)).

Disclosure. The Board's report under s.134(3) must disclose the composition of the CSR Committee (s.135(2)).

Step 3: policy, recommendation, approval

The Committee has three jobs (s.135(3)):

formulate and recommend to the Board a CSR Policy indicating the activities to be undertaken in areas or subjects specified in Schedule VII;
recommend the amount of expenditure on those activities; and
monitor the policy from time to time.

The Board then has two jobs (s.135(4)). First, after taking the Committee's recommendations into account, it approves the policy, discloses its contents in its report, and places it on the company's website, if any, "in such manner as may be prescribed". Second, it ensures that the activities in the policy "are undertaken by the company".

In a company that falls under the s.135(9) exemption, the Board does all of this directly. The minutes should still show the three steps (recommendation, spend amount, approval) as separate agenda items, so that the record shows the statute was followed in substance.

Schedule VII is the list against which the policy's activities are framed. This note does not summarise its heads. The list is long, and the more detailed conditions on what qualifies are in the Rules. Read the current Schedule VII and the current Rules before approving a project list.

Step 4: the annual spend

The Board "shall ensure that the company spends, in every financial year, at least two per cent. of the average net profits of the company made during the three immediately preceding financial years" in pursuance of its CSR Policy (s.135(5)).

Young companies. The sub-section carries a bracket for a company that "has not completed the period of three financial years since its incorporation": there the average is taken over "such immediately preceding financial years", meaning the years that exist. The bracket applies only to a company under three completed years. A company that has completed three years uses the three immediately preceding years, even if some of them were loss years.

Local preference. The first proviso requires the company to "give preference to the local area and areas around it where it operates" for the amount earmarked.

Excess spend. The third proviso allows excess spending to be set off against the requirement "for such number of succeeding financial years and in such manner, as may be prescribed". The number of years and the manner are in the Rules.

Step 5: if the money is not spent

The second proviso to s.135(5) creates two separate paths.

Path A: not spent, not an ongoing project. The Board must, in its report under s.134(3)(o), "specify the reasons for not spending the amount". It must also transfer the unspent amount "to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial years" (the Act's own wording).

Path B: unspent amount relates to an ongoing project. The Board gives reasons in the same way, but is not required to make the six-month transfer. Section 135(6) applies instead:

the amount must be transferred "within a period of thirty days from the end of the financial year" to a special account, opened for that financial year in a scheduled bank, called the Unspent Corporate Social Responsibility Account;
the company must spend it on its CSR obligation "within a period of three financial years from the date of such transfer"; and
if it does not, it must transfer the balance to a Schedule VII Fund "within a period of thirty days from the date of completion of the third financial year".

Section 135(6) applies only to an ongoing project "fulfilling such conditions as may be prescribed". What counts as an ongoing project is therefore a matter for the Rules, not for the section alone. A company that wants to use Path B should confirm, against the current Rules, that the project meets those conditions before relying on it.

Penalties

Under s.135(7), a company in default of s.135(5) or s.135(6) is liable to a penalty of twice the amount required to be transferred to the Schedule VII Fund or the Unspent CSR Account, "or one crore rupees, whichever is less". Every officer in default is liable to a penalty of one-tenth of that amount "or two lakh rupees, whichever is less".

Two features are worth noting for the board:

The base is the amount required to be transferred, not simply the total of unspent CSR money. If a company has made the required transfer in time, there is no default for that amount.
Each limb has its own ceiling, and the lower of the two figures applies. For a small default the proportionate figure is the one that matters.

Section 135(8) adds that the Central Government may give general or special directions to a company or class of companies to ensure compliance, and the company "shall comply with such directions".

A yearly checklist for the board secretary

When	What
Before the year opens	Test the three limbs on the preceding year's numbers, using the section 198 profit reconciliation
First board meeting of the year	If caught: constitute the Committee, or minute that s.135(9) applies and the Board is discharging its functions
Committee / Board	Recommend the spend and the policy; approve the policy; place it on the website if the company has one
During the year	Execute projects, local area first; keep records of spend against the policy
At the board report	Disclose Committee composition; give reasons for any shortfall under s.134(3)(o)
After year end	Move any unspent, non-ongoing amount to a Schedule VII Fund within six months; move ongoing-project amounts to the Unspent CSR Account within thirty days

What to do now

Next step: test the three limbs of s.135(1) on the last audited year, using the section 198 profit, and minute the result either way (s.135(1), s.135(5) Explanation, s.198).
Deadlines to calendar: six months after the financial year ends for a Schedule VII Fund transfer; thirty days after the year ends for the Unspent CSR Account; and, for any amount sitting in that account, three financial years from the transfer date, plus thirty days from completion of the third year (s.135(5) second proviso, s.135(6)).
Consequence of missing them: a penalty on the company of twice the amount required to be transferred or ₹1 crore, whichever is less, and on each officer in default of one-tenth or ₹2 lakh, whichever is less (s.135(7)).

Have a CA review your facts before you act or file.

What this note does not cover

The CSR Policy Rules made under s.135 govern how the set-off period works, what conditions an ongoing project must meet, which sums are excluded from net profit, and the detail of what qualifies under Schedule VII. They have been amended since the Act text quoted here, and this note does not state any figure or condition drawn from them. Use the current Rules alongside the section.

FAQ

Does a company that is below all three thresholds have to do anything?
Not under s.135(1). The test is run on the immediately preceding financial year, so it should be repeated each year.

Can the Board act as the CSR Committee?
Yes, but only where the amount to be spent under s.135(5) does not exceed ₹50 lakh (s.135(9)).

Is the six-month transfer the same as the Unspent CSR Account?
No. The six-month transfer goes to a Schedule VII Fund. The Unspent CSR Account is the ongoing-project route, with a thirty-day deposit and a three-year spending window (s.135(5), s.135(6)).

Can excess spending in one year be carried forward?
The third proviso to s.135(5) allows set-off against later years "as may be prescribed". The period is in the Rules.

Who is penalised for a default?
The company and every officer in default, each subject to its own cap (s.135(7)).

Last verified 2 November 2026 against the Companies Act 2013 as consolidated on India Code. General information only; not advice on any particular company's facts.

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